A corporate law firm uses time series analysis to forecast the number of billable hours for the upcoming quarter. They use a centered moving average to isolate the trend.

What is the primary purpose of calculating a moving average in time series analysis?

Answer options:

To measure the exact seasonal variation for each quarter

To smooth out historical data by eliminating seasonal and random variations

To calculate the correlation coefficient between time and billable hours

To adjust historical data for inflation

How to approach this question

Recall the components of a time series (Trend, Seasonal, Cyclical, Random). Moving averages average out the peaks and troughs.

Full Answer

B.To smooth out historical data by eliminating seasonal and random variations✓ Correct

The primary purpose of a moving average is to smooth out short-term fluctuations (seasonal and random variations) in time series data to make the underlying long-term trend clearer.

Common mistakes

Confusing the purpose of moving averages with the calculation of seasonal indices.

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